The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

Continued from page 2

As with all new businesses the vast majority of these will fail. But that's OK, we need those failures because they're the inevitable result of trying new things.

The question becomes though what is the correct regulatory regime to reduce fraud to what we might term an acceptable level?

To a large extent I think that the UK system works. Works well enough, certainly. It has always been true that any private company can ask whoever it likes to invest and anyone can invest in any private company that will have them. The restrictions on what you can do come when you attempt to float on a public market.

At which point, if you go onto AIM (think, roughly, NASDAQ although not quite, for it is more about raising new capital rather than allowing earlier investors to cash out) then you need a NOMAD. This is a regulated financial advisor who is responsible for the probity of the company. Everyone in the market knows there's some dodgy NOMADs and who they are and their word is appropriately discounted.

What Crowdcube has done is get one of these NOMADs to overlook the business plans of all of the companies looking for investment. It's a passing look, not one in detail: it's looking for the fur bearing trout farms, not plans that are too risky or do not understand their markets well enough. After that there's really only one restriction. As an investor you are limited as to how much you can put in. Anyone can slip £50 or £100 to anything that takes their fancy. Start getting into life changing amounts, £20,000 say (the actually limit is lower than this) and you have to prove that you are what UK law defines as a "sophisticated investor". At which point you're on your own as you should be and left with just caveat emptor.

As I say, I think that probably is roughly the right way to go about it. Allow anyone at all to throw wallet style money, the amount that someone might have in their wallet, at absolutely anything they want to. And allow pretty much anyone to try and hoover up those sorts of sums. Yes, there will be fraud but there will also be real investments that succeed which won't happen any other way. Prevent the plundering of life changing amounts from people simply by insisting that they must prove their sophistication before they can invest such amounts.

Perhaps this isn't the correct set of trade offs. Happy to be corrected on that if you wish. But we are still left with that basic underlying point, that there is a trade off between the ease with which a new business can gain funding and the restrictions we put in place against fraud. And I would argue that the obvious success of crowd sourcing of funding should lead to a reconsideration of the optimal trade offs to be made.